The events of the past few weeks regarding the Russian invasion of Ukraine have certainly had an effect on the markets and the economy as a whole. While markets don’t normally react strongly to political or social unrest and events such as this, the implications for what this means to oil prices in an already inflationary environment has caused turmoil throughout the markets. So what impact does Russia have on the world stage as an economic power? Russia ranks 11th in terms of GDP (Gross Domestic Product) which is the value of all goods and services produced by a country. Russia’s total GDP is about $1.5 trillion vs. the U.S. of $21 trillion making the US’s GDP roughly 14x larger than Russia’s. Russia’s wealth per capita however ranks 92nd as the vast majority of Russia’s wealth in concentrated to a handful of very powerful people. To put Russia’s nominal GDP into perspective, it is actually smaller than NYC. This however, is a little misleading since things in Russia cost less than in NYC but you get the idea. Russia’s representation in the world’s stock markets represent less than 1%.
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If Russia’s economy is so seemingly insignificant, then why are they having such a big impact today? For starters, Russia’s national revenues are comprised of nearly 40% oil & gas and 60% of its exports. Much of that oil is exported to China and Europe with a small amount (roughly 8%) to the U.S. By comparison, the U.S. receives about $2.5 billion in revenue from oil compared to total U.S. revenues of about $3.5 trillion. Clearly this is an insignificant number since our oil is not State run unlike Russia. It’s interesting to note that the top 5 oil producers in the world (based on 2020 statistics) are 1. USA — 16.5 million barrels per day; 2. Saudi Arabia — 11 million; 3. Russia — 10.6 million; 4. Canada — 5.1 million; and Iraq — 4.1 million.
Russia’s invasion of Ukraine is having a big impact on the economy because much of Europe is dependent on Russian oil and natural gas in particular. Ukraine is also a mineral rich country. It comprises only 0.4% of the earth, it accounts for 5% of the world’s mineral resources. Ukraine has the world’s 7th largest coal reserve. They also have over 10% of the world’s iron ore reserve and have the largest titanium reserve in all of Europe. Ukraine along with Russia are both major wheat producers which will undoubtedly have an impact on grain prices. The importance of Ukraine’s geographic strategic importance of it’s location along the Black Sea can’t be overstated. With Ukraine under Russian control, Russia now has direct access to Europe for both a supply line and potential military access.
So, what does all of this mean for the economy. First, the uncertainty has led to much higher oil prices which are starting to pull back but I would expect higher prices to stick around as gas companies will likely take advantage of the situation even when oil prices fall below $100/barrel. Next, higher oil prices affect the price of almost all goods and services since oil moves everything around the globe. We were already experiencing high inflation, and this will likely only make it worse. I think the Federal Reserve will do what it can to mitigate inflation but honestly, I think they are limited in their options because the fear of a global slowdown due to the conflict in Ukraine may cause them to raise rates slower than anticipated. Therefore, I would expect higher inflation for an extended period of time.
Lastly, as I always say, the only thing the stock markets hate is uncertainty. Once the picture becomes more clear regarding the situation in Ukraine, I would expect the stock markets to begin to improve. There are however, a lot of factors that could happen to change that view, but personally I think we may be near a bottom. I think we may see markets rise going into the 2nd half of the year. Regardless of what happens this year, investors should keep a long-term focus and feel confident that while markets may stay down for a while, over time, they have always recovered and this time will ultimately be no different.
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